Monthly Archives: March 2016

Government policies can drive a substantial impact on an industry growth, more so if government happens to the buyer. Defence industry is peculiar because in many countries, government is the major supporter, manufacturer and end user. Mr Manohar Parikkar, Defence Minister on 28th March 2016 announced new defence procurement policy (DPP-2016) at the DEFEXPO happening at Goa. The core of the new policy is to boost home grown defence industry and further Prime Minister’s “Make in India” initiative. The focus of new defence procurement policy is heavily on promoting India designed and made weapon systems (IDDM). The policy has clear directions on the procurement preferences: India designed and manufacture (IDDM) weapon systems would get the highest priority compared to license manufacturing or global import. While the policy has announced local content for qualifications, lets understand what DPP-2016 is attempting to do.

First, it is trying to address the legacy issue the defence industry faces, monopolistic defence public sector units (DPSU). Services (Army, Navy & Air) have long suffered inordinate delays, corruption, and misplaced engineering and R&D focus. In the last few years, the DPSU have been flushed with so many orders that one of the PSU head jokingly said they could completely lay off their marketing team for next decade. Defence ministry recognizes the need to bring in dedicated partners to de-risk delays in production of imported systems and subsystems. Under DPP-2016, defence ministry can seek private or DPSU units compete for weapon system design and development. Defence Ministry can select two “development agencies (DA)”, will subsidize 90% of the agencies weapons development cost and assure the DA of major share of the production order. Pursuing this strategy is not going to create large defence innovation engines, but contractors like Raytheon or Northrop Grumman to ensure production schedules are met. DA is not a silver bullet to drive innovation or “Startup India” program of Prime Minister, but a well thought out and practical policy to create private facilities. DA’s may work on technologies, systems and subsystems from abroad, bring in system integration efficiencies. The game plan is to excite local players like Tata, Reliance, Mahindra’s to partner, build large facilities and develop local system integration capabilities. In medium run, this policy may have a spill over effect on Aerospace and Cryogenic Industry’s manufacturing requirement and allied services. The new policy envisages more industry involvement right from feasibility stage for major weapon buys and service requirements. This should eliminate the frictions that arise in design-delivery cycle as requirement gathering, standards and integration are detailed and purposeful. We will see better design coordination in large complex projects like IFCOS and others. Hopefully, we will not see the lack of ownership and creep in multi-agency defence projects.

DPP-2016 has clearly failed how it would support innovation and MSME development. Traditionally innovation in defence industry has come from multi-party development involving government, large contractors and research institutes. In recent years, several disruptive technology innovations have emerged from rank outsiders as the demarcation between military and civilian applications is eroding. SME play critical role in not only developing new technology, but also develop subsystem components where OEM support ceases or design appropriate digital replacements for analog components. Antiquated procurement procedures with norms such as minimum number of operative years, or capital adequacy norms and L1 pricing discourage SME’s. Defence programs can only be successful if the defence ministry shift away from tender based to need based procurement wherein the Services (Army, Navy and Air) and DRDO labs can procure novel technologies. Most MSME operating in the sector are underinvested and need flow of cash to sustain. Defence ministry should consider support to private sector through targeted R&D incentives, access to low cost capital, priority lending and increased slab of CGSTME Scheme. DPP-2016 is a definitive program to boost home grown defence industry and remains a work-in-programs. Hopefully when it is reviewed after six months the new DPP-2016 will address all concern areas and boost India’s defence industry growth.

Dr TR Madan Mohan is managing partner of Browne & Mohan. He is associated with several MSME defence companies advising them on scaling up, growth and global expansion.